7-Eleven's Legal Unease

A series of publicity nightmares put the retailer and its franchisees on the defensive.

Even amid charges of siphoningfunds, unrecorded sales, wirefraud, stolen identities andharboring illegal aliens, the most surprisingaspect of the widening legal issuesfacing the 7-Eleven franchisee system ishow unsurprised franchisees are about it.

A sampling of franchisee reactions:“7-Eleven’s known about this for years.”“7-Eleven chose to look the other way.”

And from one former 7-Elevenemployee: “At any given time, at least 10%of my franchisees [were] stealing in prettysignifi cant quantities.”

Most of the comments refer specifi callyto 7-Eleven’s claims against a well-knownfranchisee, Tariq Khan, former chairmanof the National Coalition of Associationsof 7-Eleven Franchisees (NCASEF), who isaccused of siphoning funds, “open-drawerschemes” and unrecorded sales.

“There were so many schemes goingon, and [the franchisees] would teach eachother how to do this,” he told CSP magazineon condition of anonymity.

The more than a dozen franchiseescontacted for this story were less likely tosay they’ve witnessed anything as egregiousas human traffi cking—a key elementin a U.S. Department of Justice indictmentof nine 7-Eleven franchisees on the EastCoast—but most said they’ve seen basicemployee-rights violations ignored by7-Eleven corporate management.

“Many new Americans do bring peoplein [from outside the United States]and break the law by making them workexcessive hours,” said a franchisee on theWest Coast, again on condition of anonymity.“They’re there 12 hours a day,seven days a week. It’s very common.”

“There were many franchisees thathad family members that probably overstayedtheir visas and were not paid, perse,” added the former fi eld manager. “[Itwould be], ‘This is my cousin; he’s goingto work for me to pay off a debt.’ ”

In light of the legal activity and mediacoverage connected to the c-store industry’slargest, most well-known brand, CSPdelved into both issues to assess wherethey stand and what they might mean for7-Eleven Inc. and its franchisees.

Nine Stores Raided

The federal sweep into one of the country’slargest cases of human traffi cking netteda slew of indictments against 7-Elevenfranchisees in Long Island, N.Y., andVirginia, including conspiring to harborillegal immigrants employed at the stores,conspiracies to commit wire fraud andstealing identities.

News of the June 17 arrests made headlinesacross the United States and in othercountries, where coverage often concludedthat “slavery is still an American problem.”The arrests also served as a timely hook forSecretary of State John Kerry, who, twodays later, released the State Department’s2013 Traffi cking in Persons report. Kerrydidn’t specifi cally mention the 7-Elevenfranchisee charges, but national news outletsreported the stories together.

While the original indictments focusedon nine franchisees of 15 c-stores in LongIsland and eastern Virginia (see sidebar, p.72), U.S. States Attorney Loretta Lynch saidmore arrests could follow as part of “anongoing investigation into the employmentand exploitation of illegal immigrants at7-Eleven franchise stores nationwide.”

7-Eleven has not been named adefendant in any of the allegations, butinformation from a source deep insidethe human-traffi cking case suggests thatcould change as the initial defendantsreach plea agreements and the investigation“turns its attention uphill.”“[The charged franchisees] would be able to tell about how 7-Eleven corporateknew all about what they were doing,” thesource told CSP under a strict conditionof anonymity.

7-Eleven’s Response

For its part, Dallas-based 7-Eleven Inc.released a statement soon after the arrests:“7-Eleven Inc. has cooperated with thegovernment’s investigation. All of ourfranchise owners must operate their storesin accordance with laws and the 7-Elevenfranchise agreement. 7-Eleven Inc. will takeaggressive actions to audit the employmentstatus of all its franchisees’ employees.7-Eleven Inc. is taking steps to assumecorporate operation of the stores involvedin this action so we can continue to serveour guests. We continue to cooperate withfederal authorities in this matter.”

Since then, franchisees as a whole havehad only a single communication with7-Eleven corporate. The one letter tofranchises from 7-Eleven executive vicepresident and chief operating officer DarrenRebelez issued a directive to conductself-reviews of personnel compliance bythe end of June or face up to $1,100 infines per violation. Also, Rebelez said thecompany would conduct its own auditsof franchises beginning July 1.

Beyond that, 7-Eleven has been in an“informational blackout,” sources say, andrefused to comment for this story.

The current chairman of NCASEF,Bruce Maples, a franchisee in Tucson,Ariz., offered these comments: “Membersof [NCASEF] pledge to observe thehighest standards of competency, fairnessand integrity in the conduct of their relationsas franchised owners of 7-Elevenstores.” NCASEF represents the interestsof approximately 4,700 c-store ownerswith nearly 5,900 franchise-owned storesthat employ more than 40,000 workers.

Back-Office Blunder?

At issue is 7-Eleven’s back-office systemand who knew what when, according toseveral 7-Eleven franchisees who spokeon condition of anonymity.

“Basically, the ISP runs the store,” oneoperator said of 7-Eleven’s in-store processingsystem, which manages ordering,scan data, payroll and more. The systemis so sophisticated it knows how manycups of coffee, candy bars and cigarettesare sold every day at each store.

“7-Eleven corporate is extremelyinvolved in the day-to-day operations ofthe store,” the operator continued. “Withall that oversight and sophistication, it’sextremely difficult to believe 7-Elevencouldn’t red-flag the payroll abnormalitiesthat is alleged to have happened.”

7-Eleven franchisees tell CSP thatthe payroll system is virtually foolproof.Employees begin and end their day byentering their PIN, which basically clocksthem in and out. The information feedsdirectly into 7-Eleven’s corporate office,where a centralized payroll system paysall workers via direct deposit, moneynetwork or a hard check.

Among the allegations is that thefranchise owner or managers were enteringand deliberately underreporting thenumber of hours employees were working.Also, they are suspected of receivinghard checks and, in some cases, cashingthem, paying out a portion to the workers,and pocketing the rest.

Legal experts and c-store industry veteransare wondering how 7-Eleven corporatefailed to snag the payroll irregularities,and how exposed the company could be tolegal recourse.

James McGrath, partner in the Ohiobasedlaw firm McGrath & Grace Ltd.,which works with companies on internalcompliance investigations, articulated thisin a blog: “The organizational concern for7-Eleven ought to be predicated upon itsrole in failing to detect this scam, payingthese illegal-immigrant employees, andany resulting liability that it might have forthe same. … But what of 7-Eleven’s role inthe payroll fraud and the higher-profilehuman-trafficking angles, if any?”

In a follow-up interview with CSPMcGrath said federal investigators will wantto understand what 7-Eleven corporate’sresponsibility and legal obligations are.“How does 7-Eleven’s central computer systemnot identify that it’s paying two peoplewith the same Social Security number?”he said. “My question is: What checks andbalances did 7-Eleven have, and what stepsare they now taking to ensure they’re gettingaccurate information [on payroll]?”

McGrath questioned whether 7-Elevenhad monitored its payroll system. Had itdone so, “then 7-Eleven’s people shouldhave caught on to the entire fraud schemeand conducted an internal investigationthat would have yielded not only the payrollscam, but the concomitant human-rightsabuses that reportedly went along with it.”

Since 2003 CSP magazine has ranked No. 1 in readership and market share over all other industry publications. C-store marketers have identified CSP as the preferred magazine source for their trade marketing communications. With industry-leading, highly targeted circulation to more than 100,000 subscribers, CSP reaches the key convenience retailing decision-makers fifteen times a year.